America's CAR-MART Inc (CRMT) 2010 Q4 法說會逐字稿

Good morning, everyone. Thank you for holding and welcome to America's Car-Mart fourth-quarter 2010 conference call. The topic of this call will be the earnings and operating results for the Company's fiscal fourth quarter and year-ended April 30, 2010. Before we begin I would like to remind everyone that this call is being recorded and will be available for replay for the next 30 days. The dial in number and access information are included in this morning's press release. which can be found on America's Car-Marts website at www.car-mart.com.

As you all know some of managements' comments today may include forward-looking statements, which inherently involve risks and uncertainties that could cause actual results to differ materially from managements' present view. These statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The Company cannot guarantee the accuracy of any forecast or estimate, nor does it undertake any obligation to update such forward-looking statements. For more information regarding forward-looking information please see item one of part one of the Company's annual report on Form 10-K for the fiscal year ended April 30, 2009 and its current and quarterly reports furnished to or filed with the Securities Exchange Commission on Forms 8-K and 10-Q.

Participating on this call -- participating on the call this morning are Hank Henderson, the Company's Chief Executive Officer and President, and Jeff Williams, Chief Financial Officer. And now I'd like to turn the call over to the Company's Chief Executive Officer, Hank Henderson.

Thank you, operator, and welcome, everyone. To say we're pleased with the results of this past year might be a bit of an understatement. It is very satisfying to see that hard work and watching your pennies truly does pay off. As you saw in our press release this morning our top-line revenues for quarter increased by 14% over last year's fourth quarter, with 11.8% coming from same-store sales growth. With over 8,000 units sold for the quarter, we ended the year with a 12.2% increase for the year in unit sales as we have continued to realize more of the capacity of our younger stores. It is important to note that while our sales capacity's obviously related to the number of stores we have, our ability to produce more sales is highly correlated to our number of active customers and throughout the past year our customer count has increased by over 5,000. Now keep in mind that over 80% of our customers choose to pay in person so that represents a significant increase in the number of people who will be routinely visiting our lots and that is a tremendous opportunity for us.

These sales numbers are impressive but everyone who understands our business understands that increasing sales is not a good thing if the quality's been sacrificed in the process and I am very pleased to report that we have seen improvements with our underwriting as our sales have increased. Our average down payments increased from 8.6% for the fourth quarter of last year to 9.2% in this past quarter. We're equally pleased with our collection results. Our provision for credit losses for the quarter was 19.3% versus 20.8% for the same quarter last year. And Jeff will go into a lot more detail here in just a moment but I would simply like to highlight that our losses, both as a percentage of sales and as a percentage of receivables, were down and our payments were up. These solid collection results, along with continued improvements in down payments, made for exceptional cash flows,

So I would like to turn it over to Jeff to give you more detail on these numbers.

Thanks, Hank. Our 14% top-line revenue increase for the quarter was a result of an 11.3% increase in unit volume, a 0.3% increase in average retail sales price, a 32.4% increase in interest income, and a $1 million increase in wholesale sales, and as Hank mentioned same-store revenue increased by eight point -- 11.8% for the quarter. The increase for the quarter and our down payment percentage was impressive and basically means that our customers' day-one investment in their vehicles totaled an additional $418,000, or $51 per retail unit sold for the quarter. In addition, our principal collections as a percentage of average receivables increased to 18.4% from 17.7% for last year's fourth quarter. The increased collections equaled approximately $1.8 million for the quarter. Between the increased day-one down payments and the additional principal collections during the quarter, our customers are much more invested in their individual loans than at this time last year.

Also, after receipt of our special payments for the third quarter's zero down tax promotion, a large percentage of which came in in the fourth quarter, our effective early equity percentage for third quarter sales ended up at approximately 12% compared to slightly less than 11% last year. This means that our customers have approximately $1 million more invested in their vehicles for this year's third quarter compared to last year's third quarter pool. The additional investment from our customers in both the third and fourth quarter pools is expected to have a positive impact on future loan performance. For the quarter, our average initial loan term was 26.3 months, up a little more than one week from 26 months last year. Our weighted average note term for the entire portfolio, including contract modifications, was 27.7 months at April 30, 2010 compared to 27.6 months at this time last year. Considering the slight increase in average retail sales price, as well as the increased interest rates for Arkansas loans, we remain pleased with the overall term length within the portfolio.

The average retail sales price increased slightly to $9,220 from $9,189, or 0.3% for the fourth quarter of fiscal 2009. Sequentially, the average retail sales price decreased 0.5%, or $47 from our third quarter. For the full fiscal year our average selling price was up $81, or 0.9%. In light of the recent strong wholesale pricing trends, we continue to push the leveraging of our purchasing strengths and are very pleased with our ability to continue to maintain margins and hold down selling prices. Minimizing our purchasing costs and the resulting money on the Street keeps the vehicles affordable for our customers, helping to keep term lengths short, which is critical to our success. We'll continue to focus significant efforts in this area of our business.

The overall average retail units sold per month per lot for the quarter was up almost 7% from the fourth quarter of 2009 and includes the effect of the seven new dealerships we've opened in 2009 and 2010. The newest dealerships averaged approximately 21 units sold per month per lot with the remaining dealerships averaging a little less than 29 for the quarter. Once again, we did see broad volume increases across most all of our lots and across all categories;the 10-plus year category, the five to 10-year age group, and the less than five year age group. We continue to believe that all of our dealerships have significant room for top-line growth but as we've indicated, we do expect that a large percentage of future growth at the top line and increased profitability is going to come from our stores that are less than 10-year's old, as well as from new store openings. Leveraging opportunities within our current store base will continue to be heavily emphasized and as we've discussed, we plan to add new lots into the future at an approximate 10% rate and a grassfire approach as trained and qualified associates become ready.

Interest income was up 32.4% for the quarter due to an increase in average finance receivables outstanding of $31 million and an increase in the weighted average interest rate during the quarter to 12.8% from approximately 11% for the fourth quarter of last year. The weighted average interest rate for all finance receivables at April 30, 2010, was 13.4% compared to 11.5% at this time last year. The weighted average interest rate for Arkansas loans, where right at half of our outstanding loans were originated, was 10.1% at April 30, 2010. The average Arkansas rate started the fiscal year at 6.7% and moved to 7.2% by the end of our first quarter to 8.4% by the end of our second quarter and then to 9.4% at the end of the third quarter and as discussed, ended up the year at 10.1%. As a reminder, these sequential increases in the Arkansas rates between periods resulted from the passage at the federal level of the Supplemental Appropriations Act of 2009 in June of last year. We are now permitted to charge up to 17% loans -- 17% for loans in Arkansas. We began charging 12% to our Arkansas customers in June of last year and we anticipate charging this rate on a go-forward basis for new sales. As a reminder, the federal legislation does have a sunset provision and the voters in Arkansas will be voting in November on a state constitutional amendment, which will effectively accomplish the same results.

For the fourth quarter of this year our gross profit margin percentage was 43.9% of sales, up from 42.7% in the fourth quarter of last year and down slightly from 44% sequentially. The improvement from the prior-year period relates primarily to pricing efficiencies, gross margin improvements for wholesale sales, improved margins on the payment protection plan product, and slightly-lower repair costs. We will continue to focus efforts on holding down purchase costs, which has a direct effect on overall gross margins and as previously discussed, we do expect to see gross margin percentages in the 43% to 44% range on a go-forward basis.

In the fourth quarter of this year SG&A as a percentage of sales increased to 19.2% from 18.4% same period last year. The increase in the percentage and overall dollars for SG&A related primarily to higher payroll costs and to other incremental costs related to new lot openings. Non-cash stock-based compensation was up approximately $500,000 for this year's fourth quarter compared to the fourth quarter of 2009. Excluding the increase in stock-based compensation SG&A as a percentage of sales would have been closer to 18.5% for the current quarter. As previously discussed, the increase in overall payroll costs includes increases in our HR, IT, and collections areas. Our MIT program currently has over 40 associates in various stages of training to support our needs as we grow. Also, many compensation arrangements at the lot level are based on profitability, including collections results, and as such, payroll costs have increased in step with increased profits and improved collections. For the full fiscal year, SG&A as a percentage of sales was 18.5% compared to 18.7% for 2009 and we do expect to see some benefit from leveraging as we move forward. However, with our significant growth plans, we will insure that we don't under invest in infrastructure to support the growing business.

The current quarter -- for the current quarter net charge-offs as a percentage of average finance receivables was 6% compared to 6.3% for the prior-year's quarter and as previously mentioned, collections as a percentage of average finance receivables was up significantly for the quarter. Our 30-plus past due accounts were at a very low 2.7% compared to 2.8% at this time last year. Our allowance for loan losses remains at 22% of receivables at April 30, 2010. Provision for credit losses was 150-basis points lower than the fourth quarter of last year. For the full fiscal year credit losses were 130-basis points lower than 2009. All of our credit metrics are strong and we continue to benefit from having great vehicle selection; quantity, quality and service levels while always keeping affordability our number one goal; solid market share gains in our service areas resulting from the vehicle selection, as well as our branding efforts; and continuing improvement in lot level execution within the collections area. We feel that ongoing credit constrictions continue to affect the deep subprime vehicle consumers and our competitors. Being the clear market leader gives us more collections leverage for the customer base in need of good, basic, affordable transportation.

We saw very strong overall cash flows again during the current quarter, reflected in record unit sales and resulting revenue growth of 14%, $2.7 million in net capital expenditures, $10.9 million in common stock repurchases, all with only a $3.6 million increase in total debt. At April 30, 2010 we had $19.6 million in additional availability under our revolving credit facility. Our current debt-to equity ratio was 22% and our debt-to-finance-receivables ratio was 14.8%. Needless to say, our financial position is extremely healthy and our strong operating results have allowed us to prosper in a very difficult macro environment. Additionally, our Board of Directors has once again reauthorized the repurchase of up to one million shares under our stock repurchase plan. Since February 1 of 2010 we have repurchased 487,000 shares under this program and will continue to invest in the repurchase program when favorable conditions present themselves to us.

And now I'll turn it back over to Hank.

All right, thanks, Jeff. Again, I'll say it is very satisfying to see the hard work of our associates reflected in the results and I can not begin to adequately express my appreciation for the hard work of our associates and their level of dedication to our customers. We are very fortunate indeed to have such good folks in our Company.

The numbers are impressive and the obvious question is can we build upon it and I can tell you we are better positioned to do that very thing than ever before. We have over 40 managers in training in place right now and their primary task at hand is to learn how to become an effective Car-Mart general manager so they can go out and open their own lot. As they learn from the managers they're working with and from the trainers within our associate development department, the trainers are continuing to learn, as well. Our training program is continuously evolving and improving to assure that we're doing everything we can to effectively equip new general managers with the knowledge and skill they need to be successful.

And just as our MITs prepare for their future with the Company actually the same could be said for each of our departments and our Company as a whole. As we continue to meet the demands of our present size and growth rate, we get better at what we do and we become better equipped for handling the demands of increasing numbers of locations, inventory, sales and so on. As an example our purchasing department has done an outstanding job. Not only have they effectively met the increased inventory needs of each location, they have maintained a good mix of inventory, which has, without question, contributed to our higher sales levels. They've been able to accomplish this while holding the line on our average cost. And while this group is doing an outstanding job of meeting present needs, we're also preparing to meet higher demands as sales continue to increase in the years that lie ahead by placing purchasing agents into larger markets, such as Kansas City and Oklahoma City, to open us up to more sources of inventory. We've also put a program in place we call "Sell Your Car Today" to increase the number of purchases from individuals and to also serve as another driver of traffic. This has also been incorporated into our radio and TV advertising. This program has just recently gone into full swing and we've already seen some very nice purchases through it. We do expect this program to grow as word spreads and should prove to be a good additional source of inventory.

We're continuing to put a lot of energy into further developing the systems and processes that will best facilitate our growth, while being mindful that ultimately no how good -- no matter how good our systems maybe there's no substitute for good people. Hiring the best people, providing good training and creating opportunities for our associates to grow has always been and will always be a top priority. Our HR and associate development departments have done an excellent job of recruitment and training and they continue to get better at what they do. However we do try to emphasize that training and development is not limited to our people within those apartments but rather it's a responsibility that we all share. It is a vital part of preserving our values and cultures that has brought us to where we are today and we believe that keeping these same values alive and well are a critical part of our continued growth and success in the future.

Likewise, we cannot focus on how to make Car-Mart more successful without focusing on how to make our customers more successful. As we said many times before, earning the repeat business of our customers is how we grow and is the best measurement of all of how we're doing. In this past year over 40% of the sales for many of our more mature stores were to repeat customers and we are seeing the repeat business number of our younger stores begin to grow. Presently we're taking a hard look at our down payments, our payment amounts and term links to assure that we are structuring our deals in a manner that will best assure that each customer has the best possible opportunity to successfully pay off their vehicle and continue to be a Car-Mart customer for years to come.

The formula for the growth is simple. It's not simple to achieve, it's simple to understand. Our repeat business equals increased customer count, which equals increased sales. And increasing sales is where our real growth opportunity lies as we've always been tight with a dollar and operated in a lean fashion, so we will always continue to seek out areas where we can save or be more efficient. We really don't have any major cost cutting initiatives, we simply must continue to keep our expenses in check, our collections in excellent shape, and continue to take good care of our customers so that we will continue to grow our customer base. This year we will open our 100th store and it's quite a milestone to be sure. We're not quite ready to say just exactly where that particular location is to be but it will be coming very soon. We opened five new stores this past year and we will be on track to open eight to 10 additional locations throughout the upcoming year.

So that concludes our prepared remarks and now we would like to move on to any questions. Operator?

Thank you. (Operator Instructions). Our first question comes from David Burtzlaff from Stephens.

Good morning, Hank and Jeff. Great quarter.

Hi, David.

A few questions. As pertaining to the gross margin, with used car prices increasing and really haven't come down that much lately as they normally do, do you think that gross margins are going to be sustainable around that 44% range or do you think it'll move closer towards that 43% range you've mentioned they could be in?

Well, as mentioned, we're comfortable in a 43% to 44% range. We have seen some recent benefit from better credit results, which translates to lower wholesales as a percentage of the total, and then just the strong pricing of our repos when they do go to auction has also helped that margin. So 44% may be a little too high looking forward and we're comfortable with saying 43% to 44% and we're striving for better but there are some limitations on what we can do there.

Okay. And then on the credit losses, you've done a great job bringing the losses down over the last couple of years. Do you think there's more room for improvement in that line item, especially as you accelerate new lot openings?

Well, once again we feel like the credit loss percentages we've seen this year and in this last quarter are on the low side. We've done an outstanding job and benefited from all of the initiatives we've had in place. With the new lots coming on it's not going to surprise us at all if we don't see a slightly higher percentage on that line and that's just part of growing your customer base and so we do think the current results are may be on the low side. We are expecting some improvements within collections on the execution side but at the same time we're adding new lots. But in looking forward, anything in that 20%, 21% range is going to be something we consider to be acceptable.

Okay, so 20% to 21%?

Yes.

Okay. And then finally SG&A, you mentioned a little bit about it but it really increased dramatically from where you've been. You've been running about $13.9 million through the first three quarters and then it jumped a $1.5 million.

Right.

Some of that seems to be incentive based. like you. said with the stock options. Is that a good run rate, the level you were at in the fourth quarter going forward into next year, or is that a high quarter and things should come down a little bit?

You know, you're right. A lot of that was related to the stock-based compensation. Also the profit levels were quite a bit higher in the fourth quarter and many of the compensation arrangements are based on profitability at the lots, collections were outstanding. But as far as a run rate, yes, that may be more representative of what we're expecting going forward. Some of our infrastructure investments are still coming through, not to the extent they were but we are still folding in some investments there. And as mentioned in the call -- or in the script that we do expect to see some leveraging at the SG&A line but we're not counting on a lot of leveraging there, at least over the short term. We want to make sure we don't under invest in that infrastructure so we're talking about pretty significant top-line growth as we move forward.

Okay. Well thank you very much.

Thanks, David.

Our next question comes from the line of John Hecht with JMP Securities.

Good afternoon -- or I guess good morning, guys. Thanks for taking my questions. You guys had strong sales and the net receivables was somewhat flat. I guess just to make sure that that's just related to the tax season, zero-down payments on the down payments and as well as maybe some additional principal payments related to the tax refund season?

Yes, all of the above. We really had an outstanding quarter on the collection side and we sold 8,225 vehicles and actually saw a slight decrease in the receivables outstanding at the end of the quarter, which just a further indication of how strong our cash flows were in that fourth quarter.

Okay. And just on the seasonal basis though, we would expect that to the net finance receivables to creep up, or are you seeing -- subsequent to the end of the quarter and as tax refunds and stimulus programs wane are you still seeing that type of activity?

In looking forward we do expect some healthy growth in the receivable base for the first three quarters of the year, just like we saw this year, but the tax season was very good for us and we expect improvements on that as we move forward so we're not -- we're pretty much planning on a similar pattern that we saw this year in future years as far as the growth in the receivable base.

And then with respect to the new lots, any changes either in development costs or ramp-up periods in the -- say the last four quarters?

No, it's not any differently from the last four quarters. I would say that the lots that we have opened throughout this past year are doing very well so I think we have -- we're refining our process, getting a little better at how we open the stores, but no, it should still be consistent going forward.

Okay, great. And then final cost is, has there been any change with kind of inventory composition or sales composition, or is it SUVs and trucks and the like pretty similar to where it's been the last few quarters? I guess partly I'm interested in that in the relationship to rising gas prices more recently.

The SUVs and trucks have always been a high-demand vehicle for us. We obviously -- we're in the south and we have a lot of rural customers but no, I'd say throughout the past year the mix has remained fairly constant. If you look back over the course of the past few years certainly the number of SUVs came up, but for right now I think where we are and where we've been for the past year is probably be consistent going forward.

Great. Thanks, guys, very much.

Thanks, John.

Our next question comes from Isabel [Surcus], C.K. Cooper.

Hi guys. great quarter.

Thank you.

Just to make sure I understood, you're saying that wholesale prices are still rising at this time? Were you implying that?

Yes, overall wholesale pricing has been very strong this year. Fortunately our purchasing department has been able to offset most all of that in the cars we're buying and the benefit we're seeing on the wholesale side is when we do have to have a repossession, when we run that car through auction on the sales side we've been able to get a much higher price for that car, which is helping our gross margins overall.

Okay. And then also, are you seeing an improvement in the availability of quality used cars?

Well I would say, like we said earlier, as far as if the numbers are increasing can't say for sure there but our purchasing department, as we've expanded into bigger markets we're certainly availing ourselves to more opportunity so we are exposing ourselves to more vehicles to look at so we're increasing that number by our own actions anyway.

Okay. All right, thank you.

Thank you.

Our next question comes from Daniel Furtado with Jefferies.

Thanks for your time.

Hey, Dan.

Hey. A quick question, I don't mean to beat a dead horse but looking at getting back on the margins here a little bit. You were at $9,200 or thereabout on the sales price and this is the top end of where you've historically charged. Do you think this is your upper limit or do you think with this 5,000 new customers and that growing customer base that the demographics there are such that you can charge a little bit more on the top end, or is margin maintenance going to be solely focused on your sourcing efforts?

I think you pretty well answered it there. Our intention is to continue to hold our price down so we can keep our margin about where it is and as we also mentioned, our focus is on keeping our customers successful. So right now for us holding that price down goes hand in hand with that so we don't anticipate any real change there.

Excellent. Thank you for your time, that was my only question.

Okay. Thanks, Dan.

Our next question comes from Bill Armstrong with CL King & Associates.

Good morning, Hank and Jeff.

Hi, Bill.

Interest income and really the weighted-average rate looks like was flat on a sequential basis Q4 versus Q3 and I would have thought it would have been up given that you're still ramping up with the higher-rate Arkansas loans?

Yes, that was a factor of the significant increase in principal payments and the -- additionally we saw such strong cash flows that our late fee income that goes into that same line was down quite a bit in the fourth quarter compared to third, so factoring all that out we did actually see a nice little uptick. But we're not going to see -- as we move forward we're not going to see the same percentage increases on a sequential basis that we saw early as these older loans age out and new ones come in. So I guess excluding the late fee and fee charges we were up a little bit from last quarter but the rate of increase is slowing down.

Got it, okay. Last year you were getting new customers that with the credit crunch with higher average income levels than you'd previously seen because they couldn't get financing at the conventional dealers. Are you still seeing those customers showing up or are you -- now that credit is easing a little bit are you seeing some of those customers migrating back to the more-conventional non buy-here. pay-here car dealerships?

I think that's actually sort of a good news, bad news issue. I don't think we actually realized as many of those as we thought we would when the credit really tightened up. I think we anticipated seeing a lot more of that business or a lot more of those customers drop in. Maybe they just hung on to their cars longer, I don't know, but I don't think we realized as much of that as we'd hoped so we really don't have that many -- we don't feel like we'll see -- have that many to drift away, if I said that correctly.

Okay.

We really don't see that as an impact.

I see. So you're not really seeing much of a change in the complexion of your customer or the profiles of your -- financial profile of your customer?

Well, we've seen some improvement but that's taken place at the same time we've tightened up some things and taken a harder look at it. as well. and I'm sure we did get some number of these that helped out. Just kind of emphasize that it didn't really represent a significant portion of our increased sales.

Okay. On a separate note, you had a $262,000 loss on disposal of property and equipment, what was that?

That was just cleaning up some of the locations that had been closed down a few years ago. We sold off some assets and had some equipment that got retired so it shouldn't be anything that's ongoing.

Okay. And then just to clarify the share buyback program, so you bumped it up to -- back up to a million shares so how many shares are currently available under that program? Is it a million now?

Yes, it'd be the full million.

The full million, okay.

Right.

Okay, great. Thanks.

Thank you, Bill.

(Operator instructions). I'm showing no further questions in the queue.

All right. Well, we thank everyone for joining us this morning and again obviously we're happy with things happening here and we look forward to continuing to build on our success, so thank you, everyone.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, you may all disconnect. Everyone have a great day.